A lump sum contract is a legal agreement where a contractor agrees to complete an entire project for a fixed, pre-agreed price. The key aspects are that the focus is on completing the whole project, not individual tasks, and the client knows the total cost upfront. The main advantages are minimal risk and costs for the client, and predictable cash flows and overhead costs. The main disadvantages are it is not suitable for complicated or changing projects, and the contractor faces high risk if costs are underestimated. It differs from a cost plus contract, where the client pays all costs plus fees, and from a unit price contract, which covers multiple lump sum contracts for a multi-stage project.

1. By:-
eFinanceManagement.com
https://efinancemanagement.com/costing-terms/lump-sum-contract
Lump-Sum Contract

2. 1. Meaning
2. Advantages
3. Disadvantages
4. Lump-Sum Contract vs Cost Plus Contract
5. Lump-Sum Contract vs Unit Price Contract
6. Reference
Content

3. A Lump Sum Contract is a legal contract where the contractor promises to complete the whole project at a pre-agreed
price. Here the focus is on the completion of the whole project and not on the smaller tasks.
Here the focus is on the completion of the whole project and not on the smaller tasks. When the project is straight
forward, Lump Sum Contract serves its best.
Lump-Sum Contract is also known as Stipulated Sum Contract or Fixed Price Contract.
Meaning

4. • Client of the project faces very little amount of risk.
• Minimal amount of variations.
• The target, the inputs, and the outputs, everything is fixed mostly.
• The client is fully aware of the total cost and scope of the project even before the beginning of the project.
• Cash flows are mostly predictable.
• Reduces the overhead expenditures.
Advantages

5. • It doesn’t work where the project is complicated in nature.
• Not suitable for speedy projects.
• The contractor faces a very high amount of risk.
• Cost of preparing a tender for the contract is even higher than the actual cost of the project.
• High chances of disputes between the contractor and the client.
• Such contracts become expensive if the client is constantly modifying or adding structures to the existing model.
Disadvantages

6. In a Cost-plus Contract, the client pays all the costs (including fixed, variable, and overheads) and additional
fees/margin to the contractor. Unlike, Lump Sum Contract, where payment of the approximate amount takes place.
In Lump Sum Contract, it is compulsory to have proper designs and structures before the beginning of the
construction project. In the case of a Cost-plus Contract, it is not compulsory to do the same.
Lump-Sum Contract vs Cost Plus Contract

7. Unit Price Contract is a broader concept in comparison to Lump Sum Contract. Unit Price Contract is a combination
of many Lump Sum Contracts altogether.
Lump-Sum Contracts are not that flexible in nature, while the Unit Price Contracts are flexible and deals with
multistage projects.
Lump-Sum Contract vs Unit Price Contract

8. Reference
To know more about it, click on the link given below:
https://efinancemanagement.com/costing-terms/lump-sum-contract